A fiscal deal

A carbon tax is a good idea on environmental grounds, and could also fix the fiscal problem.

Sign me up for (most of) Kevin Drum’s proposal: a non-revenue-neutral carbon tax to plug the deficit hole and shore up Social Security while eliminating the corporate tax. I wouldn’t go for cutting top income tax rates, and I’d want to phase in the carbon tax slowly to avoid a fiscal shock during the recession and to give private parties a pre-determined glide path for adaptation.

Note that if it pushes up expected prices for the future, that would provide some macro boost as a cherry on the sundae.

But should Obama say it tomorrow? Well, it would lock down the crucial undecided environmentalist policy-wonk vote, especially in key swing states such as Massachusetts and California. Might not play so well in Virginia and Ohio.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

22 thoughts on “A fiscal deal”

  1. Hello Professor Kleiman,

    Loyal reader of the blog and as it happens I also read Mr. Drum’s post this morning. I posted this comment there as well, but so far haven’t got a response, and I was hoping you could help me out.

    The goal of a carbon tax to discourage the use of carbon by putting a price to its social costs and thereby encouraging less carbon-intensive alternative sources of fuel. This is a good thing. But if this is so and is successful, wouldn’t reliance on a carbon tax as a source of revenue be a bad idea as people move to less carbon-intensive technologies over time? Is there something I’m missing?

    An alternative I could think of would be to tax carbon and then use that money as cash prizes for clean-tech innovation or (more ambitiously) greenhouse gas scrubbing from the atmosphere.

    Thanks for any help you can give me.

    1. I’m not Mark, but I have an answer — we could always worry about that when we get there. And we’d have saved the Holocene, maybe. I’ll take it!

      Plus I think putting that money into clean tech — while perhaps a very *good* idea — would not solve the problem you raise of diminishing returns once people stop using the carbon.

      1. Sure, but the goal of a carbon tax is to change behavior, not allow industry to continue polluting so long as they hand cash to the government. My worry is that we wouldn’t get to a place where we’ve saved the Holocene if we’re relying on continued pollution for revenue.

        Also, I’m not as worried about diminishing returns when the money’s earmarked for clean tech research bc, presumably, if tax revenue is diminishing that’s a sign that pollution has decreased.

  2. MAy I note that I’m very hostile to “eliminate the corporate tax”? It gives unlimited tax deferral, which I think is bad policy, and it screws with earnings distribution from normal corporations.

    My proposal: eliminate the corporate income tax only on distributed income (paid out as dividends)–and measure income as GAAP. Tax everything else at the highest individual rate, and eliminate the capital gains tax. This makes small businesses with stable cashflows more attractive, and finance and conglomerate businesses less attractive. (One of the little secrets of finance is that the taxable income is extrememly manipulable in the FIRE sector, so the effective tax rate on GAAP is trivial.)

    1. Sam,
      If you taxed capital gains like ordinary income on a mark-to-market basis but eliminated the corporate income tax, wouldn’t the incentive for unlimited tax deferral mostly disappear? I never could see the rationale for recognition events in capital gains tax anyway.

      1. I hadn’t thought of that, so this is a first response.

        I think that would work for publicly traded companies, although it would make the revenue impact of recessions much worse than it is now (since all the losses would reduce taxable income, rather than only realized losses.) It would also not change one of the mis-features of the current interaction between tax-deferred savings and corporate taxes, which is that a reduction in dividend or capital gains tax benefits only share-owners who hold shares outside a tax-deferred account (which tend to be wealthier than the people who have an 401-k with some index funds in it.)

        But for closely-held companies, where the value is at best mark-to-model, I suspect that it would not work; that’s where my primary concern with unlimited tax deferrals is.

        1. If you tax capital gains in mark-to-market, you also introduce timing problems and financing problems. On the timing side, any volatile asset will lead to tax payments one year, refunds the next and so on (but depending crucially on the date that mark-to-market is done). On the financing side, you have the basic problem that someone with an appreciated-but-not-sold asset doesn’t actually have the cash to pay the capital-gains tax. Either they’re going to divert cash from somewhere else, or they’ll have to borrow against the asset, which leads to potentially-excessive carrying costs, liquidity squeezes and who knows what else. Cure could be worse than the disease.

  3. These posts always make me think of Sam Rayburn:

    “They may be just as intelligent as you say. But I’d feel a helluva lot better if just one of them had ever run for sheriff.”

    (Obviously more to Drum, Millman at all than our host.)

    1. They may be just as intelligent as you say. But I’d feel a helluva lot better if just one of them (Drum) had ever run for sheriff.”

      We live in a world in which the richer are getting richer, most governments are broke as are most citizens.
      The world’s rich have stashed literally trillions of dollars (more than the economies of Japan and the UK combined) in tax-free hidey-holes.
      This is a central global fact: http://www.taxjustice.net/cms/upload/pdf/The_Price_of_Offshore_Revisited_Presser_120722.pdf
      Income inequality is as large and important a problem as is global warming…

      And Drum wants to cut the income tax on the wealthy?
      And let me guess: Drum got soreheaded about Sen Reid “lying” about Romney not paying any taxes?
      And Drum got soreheaded about everyone jumping up and down about Ryan’s lies in his acceptance speech?

      And you want suggest this guy gets some real world experience as a sheriff?
      How about a coyote-cum-dog catcher?
      I mean really, is there anybody that would want to share a fox hole with Kevin Drum?

      I don’t mean to demean… but:
      Drum is a textbook example of a brilliant interesting mind that frequently gets lost in its own bullshit…

  4. But isn’t this — “Well, it would lock down the crucial undecided environmentalist policy-wonk vote, especially in key swing states such as Massachusetts and California.” — about two or three people?

    Not that that’s a reason not to do it. Though I have to say, I am a little nonplussed at the idea of making life harder for ordinary people just now. Even with a phase-in, I think this could hurt. The comfortably well-off and complacent centrist Democrats have already done enough damage. I think this proposal would need more work.

    Plus, this idea would be DOA on the right just *because* it might do some good for the planet.

    1. Global warming is making life harder for ordinary people right now and will that’s going to get worse. There is no option of not making life harder for them by not instituting a carbon tax. That’s not even just because I happen to think that Bangladeshis are perfectly fine ordinary people, either. Take a look at what the drought is doing to food prices.

      If you want to worry about ordinary people, deal with it by spending the carbon tax revenue in a way that benefits them.

      1. Well, those are good points. But I still prefer some kind of easing of the burden for the people on the bottom, whether here or in Bangladesh. Plus, politically it might help. It’s not like we have to do one or the other — we could help people suffering from drought, and we could also help ease a carbon tax burden.

        I refuse to believe that we can’t figure a way to do it. Whereas, I am all to willing to wonder whether we are willing/politically able.

  5. This is a pipe dream. Like you, I’m a fan of tax increases (though progressive ones – and a carbon tax is the opposite) and of carbon taxes (or of other efforts to fight climate change). But a universe in which you can do either seems out of reach just now; a universe in which you can do both is just unrecognizable.

    About the only way you might be able to get this would be to make our tax system ludicrously regressive, by shifting a huge part of the tax burden from the wealthy to payers of the carbon tax. Given the Republican rhetoric on taxes and on anthropogenic climate change, this doesn’t seem likely to succeed, but at least it would perhaps suit the interests of some of their backers. But – even if it were feasible, which I doubt – is that really the path you want to go down?

    1. Hold the phone, Warren! I think you just discovered how to make it sell. Republicans would *love* to make life harder for poor people!!! It’s what they seem to live for.

  6. As a business owner who makes around 250k a year (and rising) I love this idea. No corporate tax means I can keep my money in the business at the end of each year rather than face the choice of paying corp or personal income taxes.

    By doing this, when I go into semi-retirement, hopefully around age 43 10 years from now, I can then pay myself a low salary that is lightly taxes while taking advantage of business deductions.

    It would also mean a huge windfall to my stock portfolio, which has many companies that unlike the microsofts and tycos of the world, are unable to avoid corporate income taxes. Retailers for example. Their profits would suddenly and permanently rise by about 50%, so would their stocks.

    1. I’m very much a layperson, but I’m pretty sure that if you want to keep more money in the business, and can find a legitimate business expense on which to spend that money for the benefit of your business, you can deduct the money from your business’s taxable income. If you just want to keep the cash parked in your business against future need or opportunity, then I suppose it would probably be taxable – though the “future need or opportunity” would probably generate usefully tax-deductible business expenses when it arose.

      Basically, I’m extremely dubious of your claims. If your business is really generating $250K in taxable income – that is, income after payroll and deductible expenses and the like – then congratulations, and get a much better accountant. If that $250K is not the taxable amount (which seems far, far more likely), congratulations are likely still in order, and you still may need a better accountant.

  7. Any switch from income taxes to consumption taxes involves a big hit to retirees who paid taxes on their income when saving, and now will pay higher taxes on consumption.

    There is no way around this, if you give my grandmother some sort of exemption I’ll just have her buy my gas for me etc. Plus the more exceptions the harder to comply with and the higher the rate needed.

    Also, carbon tax is so abstract. Why not a simple increase in the gas tax and a new tax on coal? Right there you have the vast majority of carbon emissions.

    I’d also like to see a ban on coal exports. Supplying the world market anywhere ultimately means supplying china with its extra dirty coal addiction.

    Also needed is some diplomacy to get other countries to raise their gas taxes. Mexico’s is very low, and Thailand doesn’t tax gas for farming use at all. Luxembourg exploits its neighbors with a very low for the EU gas tax. If they really care about this they can give their citizens tax rebates on gas consumed. A horribly regressive policy for a rich and the otherwise liberal grand duchy.

    1. “…and Thailand doesn’t tax gas for farming use at all.”

      Neither does the United States.

  8. Yes to the carbon tax. No, no, no to using the money to cut top income tax rates or the corporate tax or anything that doesn’t try to offset the highly regressive impact of a carbon tax.

    Increase the EITC. Plow some money into Medicaid. Increase exchange subsidies. Cut payroll taxes (below some income thresholds). And so on. Help the people who will be hurt most by this tax without muting the behavioral impact.

  9. As I pointed out in February when I tried and failed to get a discussion on the second term agenda, Australia does offer an example of a revenue-neutral carbon tax that’s actually been implemented. It’s not all roses: Julia Gillard’s government that that brought it in is unpopular, partly because the carbon tax was a U-turn. But the repeal promised by the conservative opposition is a poisoned chalice: how can they fund what are now handouts to Big Coal without reversing the tax cuts for the middle class? Also, the economic doom they predicted has naturally failed to materialise. Watch this space.
    The politics in the US are different because of the imminent expiry of the Bush tax cuts and the fiscal cliff. Whether a carbon tax is revenue-neutral or not depends on your baseline: current policy, current tax rates, or Obama’s proposal. But since (if he’s reelected) Obama and the Congressional Democrats hold the whip hand, there’s plenty of room for policy innovation.
    Who said there aren’t pro-renewables undecided voters in Colorado, Nevada and Iowa? There’s still a majority in the national electorate for renewables (though it’s been declining, with a conspicuous lack of leadership from Obama). Mark is IMHO too pessimistic.

  10. We do need to include the real costs to the environment in our economic exchanges. To “afford” this, we need to raise incomes.

    And since when is California a “swing state”?

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